BFSI And Healthcare Expansion Will Unlock Global Opportunities

Key Takeaways

• Strategic focus on high-growth verticals and geographic expansion is expected to drive revenue growth.
  
• AI-driven innovations and operational efficiencies are likely to expand margins and enhance earnings quality.
  
• Challenges in scaling, declines in key sectors, and risks in customer renewals and market stability may limit Tech Mahindra's future revenue growth.

Catalysts

Provides information technology services and solutions in the Americas, Europe, India, and internationally.

• Tech Mahindra's strategic focus on high-growth verticals such as BFSI and healthcare, as well as geographic expansion into prioritized markets like APG and Europe, is expected to drive future revenue growth.
  
• Operational efficiencies and margin improvements driven by Project Fortius are significant catalysts expected to enhance net margins moving forward.
  
• The launch of TechM Consulting and the focus on AI-driven innovations are initiatives likely to boost revenue and margin expansion through high-value services.
  
• Continued investments in key leadership hires and upskilling initiatives suggest a strategic focus on strengthening core operations and capabilities, impacting earnings positively.
  
• Strategic partnerships and robust deal win momentum are positioned to support top-line growth and improve earnings quality through diversified revenue streams.

Tech Mahindra Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tech Mahindra's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.0% today to 11.6% in 3 years time.
• Analysts expect earnings to reach ₹73.8 billion (and earnings per share of ₹82.95) by about May 2028, up from ₹42.5 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹82.0 billion in earnings, and the most bearish expecting ₹61.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.8x on those 2028 earnings, down from 31.3x today. This future PE is greater than the current PE for the IN IT industry at 26.7x.
• Analysts expect the number of shares outstanding to grow by 0.38% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.33%, as per the Simply Wall St company report.

Tech Mahindra Future Earnings Per Share Growth

Risks

• The 0.3% revenue growth on a constant currency basis demonstrates stagnation compared to a previous exit rate of minus 7%, which shows challenges in scaling the business. Continuous stagnation could impact future revenue growth.
  
• The decision to scale down non-core and loss-making businesses resulted in a 1% reduction in the topline, indicating that future revenue growth might be limited if core-business expansion does not compensate for these reductions.
  
• The decline in the manufacturing sector by about 1% and the communications sector by 4.2% reflects weaknesses in these verticals, potentially impacting overall revenue and profit margins in the future.
  
• A sequential revenue decline in Q4 was primarily due to delays in customer renewal decisions and reduced discretionary spending in specific sectors, demonstrating potential risks in timely contract renewals and customer spending which could impact revenues.
  
• The transportation towards revenue growth from prioritized markets such as Americas and non-core markets which generates a high percentage of revenue, encounters possible risks if these markets do not stabilize or grow, ultimately affecting growth projections and revenue diversification.
  

Valuation

• The analysts have a consensus price target of ₹1548.767 for Tech Mahindra based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹2000.0, and the most bearish reporting a price target of just ₹1050.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹634.5 billion, earnings will come to ₹73.8 billion, and it would be trading on a PE ratio of 28.8x, assuming you use a discount rate of 15.3%.
  
• Given the current share price of ₹1503.0, the analyst price target of ₹1548.77 is 3.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.